EU tells France to reform pensions, rein in spending
* EU ministers back Commission recommendation for France
* Paris says Commission cannot "dictate" policies
LUXEMBOURG, June 21 (Reuters) - European Union finance ministers told France on Friday to revamp its pension system by year-end and cut labour costs in return for getting longer to shrink its budget deficit to within EU limits.
The ministers backed the European Commission's detailed recommendations on how France should proceed with those reforms, despite Paris's instance that Brussels cannot "dictate" its policies.
The euro zone's second-largest economy agrees it must balance its costly pension system's accounts by 2020 and regain lost competitiveness to exit a shallow recession and combat high unemployment.
But recommendations by the Commission, the EU executive, last month on the details of the reforms, and especially the pension system, hit a raw nerve, with President Francois Hollande insisting France would go at its own pace.
EU finance ministers underscored the same message as the Commission on Friday, saying possible measures included increasing full-pension contribution periods and reviewing special schemes while avoiding an increase in employers' social contributions.
"The pension system will still face large deficits by 2020 and new policy measures are urgently needed to remedy the situation," finance ministers said in a statement.
France was also urged to simplify its tax system further, lift restrictions to closed professions, rein in public spending and urgently reform the unemployment benefit system.
EU finance ministers gave France, as well as Spain, Poland and Slovenia two more years to bring their deficits below the EU's 3 percent of GDP cap, as recommended by the European Commission, as the EU shifts its focus to structural reforms to boost growth after three years of deep spending cuts.
The Netherlands and Portugal got one extra year, and Hungary and Italy were removed altogether from the EU's "budget watch" list, along with Romania, Latvia and Lithuania.
Belgium, however, was told to bring its deficit under 3 percent Of GDP this year.
France has repeatedly stressed it has already put reforms in motion and would continue at its own pace with the steps, which include seeking deals between unions and employers to reach as broad a consensus as possible and avoid street protests.
Hollande kicked off on Thursday consultations with labour unions and employers' groups on the pension reform, with a draft law due around September.
The two-trillion-euro French economy, dogged by subdued consumer demand and weak business investment, will shrink by 0.1 percent after posting zero growth last year, INSEE statistics office said on Thursday, dashing Hollande's hopes of cutting down unemployment this year.